Federal reserve hiked rate by 50 basis points (0.5%)? How Federal reserve's increased rate impacts your loan? - financebrother

 

US Federal Reserve Hiked Rate by 50 basis points (0.5%)

Markets have to be ready for the increase in the interest rate as the US fed have taken that harder decision to control inflation. It affects all the loan holders as they have to face the burden of the increasing interest rate. Increased EMI will affect the purchasing power of the community, which directly affects the demand in the market, and may be amid the silent alarming bomb for the economic slowdown.


 Rate Hike by the US Federal Reserve as expected

As per the meeting scheduled to end on Wednesday, the Fed is hiked rates by 50 basis points (0.5%) to make the rate range from 4.25% - 4.5%. Most of the debt issued at variable interest rates means the industry has to suffer the burden of high interest rates which directly impacts their earnings. Although the banks’ earnings will also increase as they received EMI’s on the increased rate hence their earnings will improve.

Pretty Good News for the Banks Depositors
Banks will increase the interest rate on deposits as they charge more interest rates on their advances. Depositors will enjoy higher interest rates on their deposits which increases their purchasing capacity as they will spend more, this is a slight relief for the economy.

Credit Cards
Currently, the interest rate on credit cards is at a record high at 19%, (which is the major source of the banks' revenue), increased from 16% compared from last year. Usability of credit keeps on growing on a dizzying basis, which helps the banks to improve their balance sheets as most households carry over their balance month by month.

Mortgages
Mortgage loans are still at 10 years high, as the inflation and fed policies directly affect the considerable purchasing power of the new home.

As a result, the average rate for 30 – year mortgages declined slightly from 7.8% in mid-November to 6.33% currently. Though in US mortgage loan rates are fixed and linked to Treasury yields and demand is still on downward trends for 15-years and 30-years mortgage loans.

Auto Loan
The cost of buying an automobile is rising because of the effect of inflation and fed policies to manage the economy. Although auto loans are fixed, repayment of the loan is now a bit difficult for the buyers.

The interest rate on a 6-year new auto loan is currently at around 6.05%, increased from 3.86% in the beginning of the current year. Here, credit scores play a crucial role as consumers having higher credit scores will get a better deal.

Paying interest at 6.05% instead of 3.86% increased the cost of the borrowers to around $8,370 more on a Principal amount of $50,000 for a 72-month auto loan, as per recent data.

Savings Accounts
Consecutive rate hikes by the fed will also increase the interest rate for saving bank accounts. Though there is no direct influence of the Fed on the deposit rates. Currently the savings interest rate is around 0.24%, which was at the bottom at the time of the covid pandemic.

Student Loan
Students also suffer an increased interest rate, as for the academic year 2022-2023 rate is at around 5% compared from last year to around 3.75% and around 2.75% in the academic year 2020-2021. For federal students, it is like the 10-year treasury rate. The new rate for the financial year 2023-2024 will be effective from July.

Loans provided to private students have a variable interest rate while it is linked with LIBOR, which means the rate is directly impacted by the increased fed rates, means the borrower has to pay more interest on their borrowings. How much varies depends on the basis of the benchmark.

The variable interest rate for private student loans is around 3% to 14.90%, while the fixed interest rate is around 3% to 14.99%.​



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